The return on LD Discretionary, which is the largest investment fund within The Cost-of-Living Allowance Fund, stood at -1.8% on 25 August 2020. Over a 36-month period, the return is positive at 5.8%. Over the summer, share prices have continued to rise, whilst interest rates on both government bonds and corporate bonds have continued to fall. Consequently, a wide range of LD Discretionary’s assets have generated positive returns in July and August, particularly shares and corporate bonds.
Positive sentiment despite mixed economic indicators
Despite slower global economic growth, shares have delivered high returns in 2020. Technology shares, in particular, have contributed to this positive performance. Other sectors have delivered negative returns. The US share index, the S&P 500, which represents a broad cross-section of industries in the US, is now at a record high.
Key economic indicators for Europe have begun to return to normal. Both industrial production and private consumption are on the rise compared with before the summer. There has been an increase in Covid-19 infections in many parts of Europe in August, but the authorities have become better at containing the spread of the virus. At the same time, it is primarily younger people who are currently becoming infected, and the healthcare system is therefore not under the same level of pressure. Another positive development is that several promising vaccines are under development, with mass production and distribution expected to begin in the course of 2021.
In the US, industrial production has also begun to rise, whilst the services sector is still struggling. This is because the US labour market continues to lag behind. The latest weekly US figures for first-time claimants for unemployment benefit were disappointing, with more than 1 million new claims. In China, both industrial production and exports are rising again, whilst consumer confidence continues to fall. Tensions between the US and China remain high. There is renewed disagreement over the trade deal and the potentially dominant role of Chinese technology companies in the US. This could also cause turbulence in the financial markets going forward.
Falling real interest rates
Generally speaking, fiscal and monetary policy across the major economies remains very accommodative, and fiscal and monetary stimulus packages are being used extensively in Europe, the US and Asia. This has pushed interest rates down, and inflation remains low. Although real interest rates in the US are negative, there is no indication that the US Federal Reserve is currently making any changes to monetary policy. A negative real interest rate has contributed to rising share prices on the stock markets. The combination of low real interest rates and rising share prices has also contributed to a weakening of the US dollar, which has fallen by 7.5% against the Danish krone since early May.
The positive sentiment on the stock markets reflects greater clarity regarding the handling of Covid-19, a potential vaccine against the virus and improved economic indicators. However, there is still uncertainty regarding the longer-term economic and behavioural consequences of the pandemic on global financial markets. It is therefore also unclear how long fiscal and monetary policy support packages will be needed to underpin rising share prices.
